Institutional Analysts Are Practically Worthless: The Case of Maxim

Apr.28.09 | About: Maxim Integrated (MXIM)

On December 18, 2008, I bought Maxim (NASDAQ:MXIM) at 12.00/share and told my readers about my buy. Maxim is now selling for $13.70/share--a 14.1% increase in four months. The S&P 500 declined 3.1% during this same time period.

At the time I bought Maxim, JP Morgan disagreed with me. On December 16, 2008, JP Morgan's Christopher Danely downgraded Maxim stock to "underweight." In response, I wrote:

"Almost all these these analyst downgrades come after the bad news has already been released. Consequently, when a major firm issues a 'sell' or 'underweight' rating, that's when contrarians and value investors should take a closer look at a stock."

My call was obviously correct, but what's really frustrating is that now, after the run-up in the stock price, several analysts are recommending Maxim.

On March 14, 2009, Canaccord Adams upgraded Maxim. Maxim's stock price was $14.05/share.

On March 15, 2009, Citigroup upgraded Maxim. Maxim's stock price was $14.12/share.

If you had listened to these two analysts, you would be losing money right now. I don't disagree with the analysts' upgrades, assuming a long term horizon. I still think Maxim is somewhat undervalued, but I have considerably reduced my holdings and am waiting to re-enter at a lower price.

I continue to be skeptical of institutional analysts and their ratings. We need an independent website that ranks firms and their analysts based on their actual performance over three, twelve, and twenty four month horizons. The website should follow various analysts and rank them based on stock performance following an upgrade or downgrade. Hedge funds or well-off investors have access to such information, but the ordinary public is left in the dark when ascertaining analysts' credibility. That's a shame, because the public's relatively short term memory allows most analysts and their firms to avoid accountability. The Motley Fool has tried to create something along the lines of what I've suggested, but it doesn't track professional analysts.

I have been told that FusionIQ's proprietary software does rank analysts. I have been given complimentary access to the software, but have not had the time to actually sign on and evaluate it. I hope to provide a report on FusionIQ at some point in the future.

Disclosure: I own Maxim shares, and a family member works for Maxim.